Malaysia Relaxes Rules on Auto Manufacturing

KUALA LUMPUR — Malaysia said Wednesday that it would partly open its protected car industry to foreign producers in the latest economic liberalization efforts by the government of Prime Minister Najib Razak.

The new policy lifts a three-year freeze on new manufacturing licenses for cars with midsized to large engines, as well as those powered by hybrid and electric engines. The policy also offers tax breaks for companies producing hybrids and electric vehicles, a challenge to Thailand, which dominates Southeast Asia’s car industry but which has been slow to offer incentives for environmentally friendly cars.

“It is true that Thailand has done a lot better,” Mustapa Mohamad, the minister of international trade and industry, told reporters. “We would like Malaysia to be more competitive. We would like to develop a more viable automotive sector.”

The announcement appeared to be an acknowledgement that Malaysia’s decades-long strategy of supporting and protecting homegrown car brands like Proton and Perodua had failed to make Malaysia competitive regionally in the car industry. The new policy is also an affirmation of Mr. Najib’s belief that in order to attract more foreign investment, the country must scale back ownership quotas for Malays, the dominant ethnic group.

Under the new rules, foreigners are allowed to own 100 percent of production plants making hybrids, electric vehicles and conventional midsized to large sedans. Analysts said that under the previous rules, foreign ownership differed on a case-by-case basis but that foreign companies have owned between 30 percent and 51 percent of local manufacturers.

Malaysia and Thailand, both considered “tiger” economies in the 1990s, pursued radically different automotive policies over the past two decades, and Thailand has been the clear winner.

Thailand, which lured foreign car producers like Toyota, Honda, General Motors and Ford Motor to build factories in industrial zones east of Bangkok, is now Asia’s third-largest exporter of cars, after Japan and South Korea.

Thailand last year exported 775,000 cars compared with Malaysian car exports of 20,000, according to John Bonnell of J.D. Power & Associates.

Political turmoil in Thailand over the past three years and a continuing dispute over environmental protection procedures have rattled investors in Thailand, but nonetheless the country appears to have cemented its place as Southeast Asia’s car manufacturing hub.

“Thailand still has the critical mass,” said Mr. Bonnell. “You would really need a civil war to throw off people’s investments there.”

Thailand last year produced 1.4 million vehicles, compared with about 520,000 vehicles in Malaysia.

Analysts in Kuala Lumpur said Malaysia’s new policy might attract European car manufacturers like Volkswagen, Peugeot and Volvo that under the new rules would be able to produce hybrids, electric cars or conventionally powered cars that sell for more than about $45,000 and have an engine capacity of 1,800 cubic centimeters, or 110 cubic inches.

But Thailand will still retain an edge over Malaysia when it comes to attracting foreign manufacturers, said Ahmad Maghfur Usman, an analyst at OSK Research in Kuala Lumpur.

“Thailand’s incentives are still much better,” said Mr. Ahmad, referring to tax breaks and the lack of restrictions on foreign ownership in Thailand.

Malaysia introduced a National Automotive Policy in 2006, with the aim of helping the country compete with Thailand. The automotive industry in Malaysia, which includes four car manufacturers, employs about 51,400 people. Wednesday’s changes are revisions to that policy.

The government has not abandoned Proton, the largest national carmaker, which is majority owned by the government, and reiterated Wednesday its desire for Proton to form a strategic partnership with a foreign manufacturer.

Mr. Ahmad, the analyst, said that Renault and Volkswagen — which has already held talks with Proton — had been identified as possible partners. He expected a partnership to be announced by the end of the year.

Some observers predicted that the removal of some restrictions on foreign companies could be bad news for local players, who may struggle to compete with more experienced foreign manufacturers. Nevertheless, the Malaysian Automotive Association, which includes the domestic carmakers, applauded the government’s move to provide incentives for local manufacturers to develop hybrid and electric cars.

“It’s a step in the right direction, and at least now we are showing gradual liberalization and we can move forward to try to catch up with Thailand,” said Aishah Ahmad, the association’s president.

However, some analysts expressed concern over whether the country would have enough workers to staff a larger auto manufacturing sector.

Malaysia, with a population of 28 million, relies heavily on foreign workers. Earlier this year, cutbacks on the number of foreign workers allowed into the country prompted complaints from some employers that they could not fill vacancies.

Analysts say the government has little choice but to liberalize the automotive sector because of globalization pressures and World Trade Organization commitments.

Mr. Bonnell of J.D. Power said questions remained whether Malaysia’s reform plans were genuine. In the past, the government has protected its national car companies, sometimes “behind the scenes” through unwritten rules that shut out foreign carmakers, he said.

Thailand has focused on the production of pickup trucks, giving Malaysia an opportunity to become a niche producer of small cars for the region, Mr. Bonnell said.